Not all 401(K) and other qualified plans allow hardship withdrawals, but if your plan does allow hardship withdrawals, make sure it is compliant with the new rules finalized in September. All of the changes are optional for a qualified retirement plan’s 2019 Plan year. Operational compliance must begin January 1, 2020. Key changes outlined in the regulations include:
- In the past, participants were required to suspend deferrals to his/her 401(k) if he/she took a hardship withdrawal. Now, the six-month suspension of 401(k) contributions is eliminated. (Required for hardship withdrawals after January 1, 2020).
- A new type of qualifying expense related to disaster relief is added to the list: expenses and losses incurred on account of a disaster declared by the Federal Emergency Management Agency, provided the employee lives or works in the area designated by FEMA. (Allowed to be effective for distributions made on or after January 1, 2018).
- “Primary beneficiary under the plan” was added as an individual for whom qualifying medical, educational, and funeral expenses may be incurred. (Required January 1, 2020).
- The Plan administrator may rely upon the participant’s written representation that he/she has insufficient cash or liquid assets to satisfy the financial need, but only to the extent that the plan administrator does not have actual knowledge to the contrary. (Required January 1, 2020).
- The requirement that a loan be taken from the plan before a hardship withdrawal is approved can be eliminated. (Optional change).
- Hardship distributions from earnings on elective deferrals may be permitted. (Optional change).
- Hardship distributions from QNECs, QMACs, and earnings on these sources may be permitted. (Optional change).
What should you do next?
Plan procedures should be reviewed to ensure compliance with the regulations and to determine when adoption of conforming plan amendments will be necessary. Plan administrators should also determine whether they intend to implement any optional changes.
Please feel free to contact any member of the McNees Wallace & Nurick Employee Benefits Practice Group if you have any questions regarding this article.